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The 20 Best Values in Tech Hardware

Avoiding the high-risk, no-growth trap.

Study after study has shown that stocks with low price-to-earnings multiples significantly outperform high-P/E stocks. Research from my favorite investing guru, New York University Prof. Aswath Damodaran, pegged the outperformance at anywhere from 9% to 12% per year, depending on the study period. That's big money we're talking about.

But you already know that you can't just go out and buy the stocks with the lowest multiples. Companies can trade at dirt-cheap prices for a number of dire reasons, including low growth prospects, skepticism about earnings, or high risk of bankruptcy.

These dangerous stocks can quickly crater. Buy too many of them, and you'll increase your own risk of bankruptcy!

Thus, for a company to be truly undervalued, Damodaran says in his book Investment Fables: "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thingWe're looking for companies with low price-to-earnings multiples, but also a relatively low amount of risk and the potential for reasonable growth. Our screen today will cover the best value plays in the technology hardware and equipment industry, as defined by my nifty Capital IQ screening software.

There are 126 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 20.5. Here are my parameters:

To stay away from bankruptcy risk, I used Damodaran's suggestion and considered only companies with total debt less than 60% of capital.

In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates and kept only companies expected to grow EPS at 5% annually or better over the next five years. Furthermore, I required at least 5% annualized growth over the past five years.

Of the 38 companies passing the screen, here are the 20 with the lowest forward price-to-earnings multiples:

Company

Market Cap(in Millions)

Forward P/E

Debt-to-Capital

Estimated EPSGrowth

Flextronics International

$5,541

7.3

51%

13%

Hewlett-Packard

$89,111

7.8

33%

10%

Avnet

$5,222

8.2

37%

16%

SYNNEX

$1,199

8.7

33%

10%

Arrow Electronics

$4,978

8.8

36%

13%

Vishay Intertechnology(NYSE: VSH)

$2,700

9.4

22%

12%

Ingram Micro

$3,426

9.9

16%

11%

Insight Enterprises

$820

10.0

15%

15%

Black Box

$635

10.0

21%

10%

Corning(NYSE: GLW)

$31,927

10.1

11%

11%

Tech Data

$2,475

10.5

19%

10%

Harris

$6,576

10.9

44%

9%

TTM Technologies

$1,539

11.0

39%

14%

Cisco System(Nasdaq: CSCO)

$99,891

11.0

25%

11%

Synaptics(Nasdaq: SYNA)

$880

11.1

1%

16%

SanDisk(Nasdaq: SNDK)

$11,255

11.2

23%

12%

Western Digital(NYSE: WDC)

$8,727

11.6

6%

10%

Brocade Communications(Nasdaq: BRCD)

$2,783

12.3

30%

10%

LG Display

$12,167

12.6

30%

9%

Molex

$4,078

13.1

12%

12%

Source: Capital IQ, a division of Standard & Poor's.

To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas of less than 1.

What about companies in other industries? Check my archive for my past screening results, and watch this space for more over the coming days. You can also add any companies you're interested in following to your own personal Watchlist.

Author

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.